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Dean Karlan, Yale University and IPA Jonathan Zinman, Dartmouth College and IPA

Converting Borrowers into savers: Some Product development ideas FROM THE u.s . HOUSEHOLD Finance Initiative. May 2011. Dean Karlan, Yale University and IPA Jonathan Zinman, Dartmouth College and IPA. Problem. Many households low net worth, financial resiliency

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Dean Karlan, Yale University and IPA Jonathan Zinman, Dartmouth College and IPA

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  1. Converting Borrowers into savers:Some Product development ideasFROM THEu.s. HOUSEHOLD Finance Initiative May 2011 Dean Karlan, Yale University and IPA Jonathan Zinman, Dartmouth College and IPA

  2. Problem • Many households low net worth, financial resiliency • High debt loads/reliance in emergencies • Highest, safest return for many households: pay down expensive debt • Big value proposition here: hundreds, even thousands of basis points on the table • But… getting/staying out of debt is difficult, psychologically and cognitively • (Value proposition tough sell for consumers?)

  3. Opportunity and Approach • Product development using behavioral insights to “meet consumers where they’re at” • Product features that counter behavioral biases • Product features that redirect heuristics, passive learning • Mental accounting • Habit formation • Research along with development to refine product design and business model • Market research • Randomized-control testing

  4. The Skinny on Three Product Ideas • Pay Back Yourself • Convert loan payments to savings once loan paid off • Private Banking for Main Street • Debt and asset consolidation for yield maximization • Borrow Less Tomorrow • Save More Tomorrow with bigger bang for buck

  5. 1. Pay Back Yourself: In Theory • Problem: hard to get started saving. • Solution: seamless conversion of loan payments to savings/investment once loan paid off • Auto loans, home equity, 1st-mortgages nearing end of term • Approach: harness habit formation and mental accounting • Can reinforce this with messaging • “You’ve almost paid off your loan, get ready to pay yourself” • “… paid off your car/home, time to save for maintenance” • Other features: upfront commitment, back-end automation

  6. 1. Pay Back Yourself: In Practice • Business Model: cross-sell • Convenience fee? • Cancellation fee (if don’t honor pre-commitment)? • Other revenue models? • Potential distribution channels • Deposit-taking financial institutions • with or without loan portfolio • Others?

  7. 2. Private Banking for Main Street: Theory • Problem: habit formation, mental accounting, etc. can be expensive • E.g., leave money on table by borrowing high and saving low • Or by not borrowing on cheapest credit card • Solution: balance sheet level relationship with financial service provider that helps client minimize debt loads • We see debt consolidation in this market. • Idea here is portfolio consolidation: linked asset and debt accounts • Automated rules allocate liquidity to optimize debt repayment • Line of credit backstop • Redirect mental accounting from asset ownership to liquidity ownership

  8. 2. Private Banking for Main Street: Practice • Redfrog Mortgage (BC, Canada) doing a version • Business model • Cross-sell from payment service to line of credit? • Subscription/management fee? • Others? • Distribution channels • Deposit-taking financial institutions • Billpay and other payment platforms? • Information/advice engines?

  9. 3. Borrow Less Tomorrow: Theory • Problem: yield-maximizing strategy for many households is to pay down high-interest debt • Solution: target this “investment opportunity” with kitchen-sink of behavioral levers • Marketing for attention and motivation: Help consumers identify whether they should borrow less • Simple Decision Aid: Help making concrete plan to borrow less • Accelerate repayment • Limit borrowing going forward • Commitment: Offer creative ways for clients to incentivize themselves • Social commitment: peer supporters/referees • Financial commitment: performance bonds • Access commitment: “cut me off if I don’t…” • Ongoing Messaging: Feedback/reminders for follow-thru and maintenance

  10. 3. Borrow Less Tomorrow: Practice • 40% take-up rate in high-touch pilot test • Revenue model? • Subscription (as part of a larger bundle?) • Cross-sells (Savings products? Cheaper loan products? Advice?) • Distribution channels • Credit bureaus? • Billpay and other payment platforms? • Info/advice engines? • Employers? • Credit counseling agencies (for those who don’t qualify for workouts)? • Debt collectors (post- or even during-collection)

  11. Summing Up • Huge market opportunity: money on table for helping people save tons of money by borrowing less • And/or more efficiently • And ultimately save more • Behavioral insights can help develop new products and features to create and meet demand • Research discipline can help find business models that work

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